With a reverse mortgage, you can borrow against equity you own in your home while still maintaining ownership of your property. While this can be a helpful solution to cashflow shortages, there are tons of risks and expenses involved – and losing all equity you own in your home is entirely possible.
A reverse mortgage – sometimes referred to as equity release – allows homeowners 55 years and older to get access to cash by using equity they own in their home, without having to give up ownership or take on regular monthly mortgage payments.
With a reverse mortgage, you don’t have to pay monthly payments like you would with a regular mortgage. Instead, you can pay off the full amount – interest and the principal amount – when the loan is due, or at any time you’re able to. The loan is usually due when you pass away, either sell or move out of the property or you default on your loan. Interest is charged until the loan amount is paid off in full.
You can typically get a one-time lump sum of money or you may be able to access some money up front and then withdraw more using a line of credit.
How can you default on a reverse mortgage?
You might wonder how you can default on a reverse mortgage when you don’t have to make regular payments. There are, however, usually four different ways you can default:
You use the money for illegitimate purposes.
You’re dishonest in your loan application.
You let your home fall into a state of disrepair that lowers the value.
You fail to follow any conditions set out in your loan agreement.
Check with your lender before signing the contract. Some lenders may have additional conditions that can constitute defaulting.
How much can you borrow?
The amount you can borrow typically depends on a few factors including your age, your homes appraised value, the amount of equity that you own in your home and the lender in question.
Where to get a reverse mortgage
Due to their expensive and risky nature, only two financial institutions in Canada currently offer reverse mortgages:
HomeEquity Bank offers the Canadian Home Income Plan (CHIP). It’s available in all provinces and territories directly through HomeEquity Bank or via a mortgage broker.
Equitable Bank offers the PATH Home Plan. It’s only available through mortgage brokers in Alberta, British Columbia and Ontario.
You may also find reverse mortgages offered by online lenders. Your own financial institution may have similar products that may better suit your needs, so check with your bank first before applying for a reverse mortgage – it should be one of your last avenues to access much needed cash.
Are reverse mortgages risky?
Yes, you’re putting your biggest asset – your home – at risk. Since you essentially never have to pay back the reverse mortgage while you’re alive, the interest on your borrowed amount keeps adding up and essentially consumes any equity you ever owned in your home. Once you pass away, your estate will need to pay back the principal amount and interest in full – and if it’s consumed your entire equity, most of what you’ve worked for in your life is essentially gone.
If you default on your reverse mortgage, move out of your home or sell it, you’ll need to come up with a way to pay back the amount in full (principal balance + interest). If the housing market has taken a downward turn, you could struggle to pay back the total amount since your house might be worth less. If you’ve had a reverse mortgage for a few years and interest has started piling up, you could struggle to pay it back no matter what’s going on in the market.
Do I qualify for a reverse mortgage?
Generally, to qualify for a reverse mortgage in Canada, you must:
Be at least 55 years old. If a spouse’s name is also on the title ownership, both must be at least 55 years old and be listed on the reverse mortgage.
The property must be your primary residence, which means you live in it for at least six months a year.
You must own your home. If you still have a mortgage, it must be paid off in full, however you can use money from the reverse mortgage to pay it off.
You’ll need to seek independent legal advice. Due to their expensive and risky nature, most lenders require that you seek legal counsel before deciding on a reverse mortgage.
Lenders will also consider:
Where you live and the type of residence you own.
The condition of your home and your homes appraised value.
Credit score requirements
Because you don’t make monthly payments on a reverse mortgage, lenders generally don’t have a required minimum credit score. But a lender may still check your credit report to make sure you don’t have other debts that would impact your ability to pay your homeowners insurance and taxes on time. A history of delinquent payments can decrease your chances of being approved.
Costs and fees
Reverse mortgages are generally more expensive than traditional mortgages. Costs can include:
Legal counselling. Due to their risky nature, some lenders require that you seek independent legal advice before applying for a reverse mortgage.
Home appraisal fee. Your home will need to be appraised in order to determine its value.
Setup fee. Some lenders may charge a fee for administrative tasks.
Legal fees. You may have additional legal fees for closing costs.
Ongoing fees. You’ll need to continue to pay for taxes and homeowners insurance, along with interest and any servicing fees for the loan.
Prepayment penalty. Some lenders will charge a penalty should you decide to pay off your reverse mortgage early.
How to apply
Seek legal counsel. Before you can submit an application with a lender, you’ll typically need to seek independent legal advice. This is to ensure that you’re fully aware of the risks and that you’re not being pressured into applying for a reverse mortgage.
Compare lenders. Next, compare lenders to find one you’re comfortable with and offers favourable terms and conditions.
Submit an application. The application process will vary by lender, but you’ll usually be able to get started online. Some lenders also offer in-person or phone-based help.
Get your home appraised. You’ll need to have your home appraised before you can get a reverse mortgage.
Submit supporting documents. This can include appraisal and inspection documents, bank statements, tax returns and other financial documents.
Close the loan. Depending on the lender, you may need to sign the loan documents in person.
How do I compare reverse mortgage lenders?
Compare lenders based on:
Rates. You’ll be charged interest on any payments you receive from a lender. The lower your interest rate, the slower your equity will decline.
Closing costs. Compare all closing costs, paying special attention to any setup fees – which can be unexpectedly expensive.
Reviews. Check both professional reviews on Finder and customer reviews on sites like the BBB and Trustpilot to learn more about the lender and how current and past customers feel.
Pros and cons of a reverse mortgage
No monthly payments. You don’t have to make any regular monthly payments like you do with a traditional mortgage.
Keep your home. You can access cash while taking advantage of equity you own in your home.
No taxes. You don’t pay tax on any money you borrow.
Doesn’t affect benefits. A reverse mortgages doesn’t affect any benefits you receive such as Old Age Security (OAS) or Guaranteed Income Supplement (GIS).
High interest rates and costs. Rates are usually much higher for reverse mortgages than they are for traditional mortgages. Other fees, like closing costs, can add up too.
Lose equity. As your interest adds up, the amount of equity you own in your home decreases – until you could have no equity left.
Duty to repay. If you have to leave the home or move or you default on the loan, you must be prepared to pay back the amount in full. If you pass away, your estate must pay.
Family inheritance. A reverse mortgage can decrease the amount of equity you have in your property, leaving less money for your family when you die.
Timely process. Should you pass away, the time it takes to settle an estate might be much longer than the time allowed to pay back the reverse mortgage (which is usually up to 180 days after you pass away).
Alternatives to a reverse mortgage
There are plenty of more affordable and less risky alternatives including:
Moving into assisted living or other housing schemes
A reverse mortgage is an unconventional option for homeowners at least 55 years of age looking to cash in on their home’s equity without relinquishing ownership of their property. But you’ll want to understand the risks and expenses to avoid losing all the equity you own in your home or eating into an inheritance you’re hoping to pass along to your family.
If one borrower passes away, the loan isn’t payable until the surviving borrower moves out of the property or dies.
If both borrowers die, the loan balance is repaid by the estate (usually within 180 days) and any remaining equity goes to the borrowers’ heirs.
No. The money you borrow is not taxable.
You may qualify for a reverse mortgage even if you still owe money on an existing mortgage. However, the reverse mortgage must be in a first lien position, so any existing debts must be paid off. You can pay off the existing mortgage with your reverse mortgage should you choose to.
No. A reverse mortgage does not affect regular government benefits like OAS and GIS.
Emma Balmforth is a producer at Finder. She is passionate about helping people make financial decisions that will benefit them now and in the future. She has written for a variety of publications including World Nomads, Trek Effect and Uncharted. Emma has a degree in Business and Psychology from the University of Waterloo. She enjoys backpacking, reading and taking long hikes and road trips with her adventurous dog.
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